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Sub sectors give more granular detail,
such as “Asset Backed Businesses and
Renewable Energy” or “Energy and
Infrastructure”.
Tax Efficient Review use a different
taxonomy that combines the Objective
and Sector as well as providing some
information on the track record and
investment structure:
AIM based
Clean/Green
Early Stage Generalist
Evergreen with a capital preservation
investment mandate
Generalist
Generalist based on convertible loan
notes
Generalist without a track record
Generalist seeking early stage
investments without full disclosure of
investment portfolio
Hybrid asset backed and AIM based
Planned Exit
Sixteen year clean/green with
a capital preservation investment
mandate
Specialist
Allenbridge and many sites like
Morningstar, FE Analytics or the AIC site
use the widely accepted definitions:
AIM Quoted
Generalist
Specialist
Limited Life
These are a mixture of objectives and
(very high level) sectors.
Clients looking for growth would
obviously look to the funds in any of the
“growth” categories. These funds will be
investing in the equity of high potential
firms, either on AIM or unquoted, and
there will be Specialist VCTs that fit
the bill as well. Expect them to be well
diversified and run by an experienced
team – look for specific successes in
business and investment, rather than
generic statements about time served
in financial services.
More defensive clients who want to
make a lower risk (but not low risk
- VCTs are not low risk investments)
investment should look for VCTs in
the capital preservation categories.
These funds are likely to be making a
majority of asset backed investments,
or they will be focusing on securing
income as the major component of
the return. Many of these funds may
actually invest in debt by issuing loan
notes and taking a first charge on assets
or some other form of security. (This
information is often only obtained from
the Investment Memorandum and other
official documents).
Clients who sit somewhere in between
(‘balanced’) would previously have
been well served by VCTs that funded
MBOs or company acquisitions. This
is a more risky strategy than the asset
backed approach and is more risky than
buying a stake in a steady, established
company that pays predictable
dividends, but is less risky than buying
equity in small, high growth companies.
However, the changes proposed in the
July Budget 2015 and given Royal Assent
in autumn 2015 now mean that this
strategy is ineligible for VCTs.
TRACK RECORD
The majority of VCTs have been
around for some time and, while
past performance is no guarantee
of future returns, their track record
is one indication of how robust and
successful the management team’s
strategy and stock picking skills are. It’s
worth carrying out some basic checks
when you look at past performance:
has the fund manager been the same
all the way through the period you are
assessing, has the fund always followed
the same strategy and how have they
performed in comparison to their
peers?
Another check needed this year: if
the fund had an MBO or acquisition
strategy prior to autumn 2015 (even if
these are only part of the investments
that comprise the fund), its track record
may not be an indication of how it will
perform post the changes in the 2015
Finance Bill.
It’s also worth checking that the fund
has been following its stated strategy
and has not drifted from it at any point
- leaving unwary investors in unsuitable
investments. Funds that raise too
much money are susceptible to this as
they then have to look further afield to
deploy it.
TYPE OF FUNDRAISE
Investors and their advisers also need
to be mindful of the type of fundraise
they are investing in. Fundraising and
investment opportunities basically fall
into three categories:
Top ups on existing VCT share
classes. Here the investor is investing
into an existing pool of assets based
on the NAV, with an established cost
structure. The investor gets exposure
to the existing portfolio and can start
earning tax-free dividends straight
away.
New share classes within existing
VCTs. The VCT will create a new share
class, which will invest in a new portfolio
of investments. These will be kept
separate from the existing shares
(although they may merge eventually).
The VCT’s costs can be spread over
the larger asset base created by the
fundraising.
New VCTs. A new VCT, raising new
money and incurring costs for the
first time, although most new VCTs
are launched by existing providers.
Commentators suggest that at least
£7-10 million needs to be raised to make
the VCT economically viable and allow
sufficient diversification.
As a general rule of thumb, top ups are
less risky than new shares as the pool
of assets is already established and the
performance to date can be assessed.
Both top ups and new shares would
usually be considered less risky than a
new VCT - this is one of the barriers to
new market entrants.
COMMON VCT
CLASSIFICATION:
AIM
QUOTED
GENERALIST
SPECIALIST
LIMITED
LIFE